Legal: It’s a win on penalties

The approach to any failure to send a timely payless notice has at last been questioned

Is there a chance that parliament intended the payment notices system in the Construction Act to be penal? Fail to send a bit of paper telling the contractor what you intend to pay – or not pay – in the next wee while and, bingo, the penalty is slapped on you: you must pay what the contractor asked for. That’s rather like receiving your electricity bill and, if you fail to dispute the accuracy of the amount within seven days, then bingo: the penalty is to pay the amount in the bill, no matter what it is.

The case of Grove Developments Ltd vs S&T (UK) Ltd came along in February, and has since been talked about no end. Payers smile; payees scowl. It was Mr Justice Coulson’s last judgment in the Technology and Construction Court (TCC) before – after 14 years in the role – he was promoted to the Court of Appeal. In his final fling, he took the payment notices regime by the throat – in the form of the Grove case ruling.

You can almost hear him saying, “Look here, folks, I want to sort out this affair.” He didn’t actually say that, of course – instead he said: “I should say this. In all my time in the TCC, I am not conscious that I have ever concluded that one of my judge colleagues, past or present, was wrong in deciding an issue in a certain way. I am not entirely comfortable about doing so now.” Then he did. He had found himself unable to follow the same line about payment notices as was taken by judges in a number of other cases.

“It’s rather like receiving your electricity bill and, if you fail to dispute the accuracy of the amount within seven days, then bingo: the penalty is to pay the amount in the bill, no matter what it is”

Mr Justice Coulson’s bottom line is this:

If no effective payment notice or payless notice has been sent, then an adjudicator should rule that the contractor’s bill is to be paid, and no messing about.

But – and it is a big “but” – there is nothing to stop the payer from then seeking a “true valuation” in a second adjudication.

If that “true valuation” comes to less than has been paid, then it is payback time.

Pause. Some previous cases said there was no room for a second adjudication to find out the true valuation. And the effect of the Grove case is that we adjudicators are now being asked to decide detailed valuation notwithstanding that the cash has already been paid or is payable because no payment notices were sent out.

There is just a chance that parliament in the Construction Act consciously intended to penalise anyone who failed to notify an intention not to pay what was applied for. The rules did give two chances to pipe up, after all.

The re-examination by Mr Justice Coulson in Grove is very important because some other cases took a different line – a hard line. Pipe up or pay up, and that’s that. For some, that hard line was penal. Penalties and punishments are for crimes, not for breach of contract. It goes against the grain to get a civil commercial court to accept penal remedies.

The payment notice system oozes penalty. So too does the Late Payment of Commercial Debts (Interest) Act. Stumble into that because of stingy or no interest payments, and you get penalised with a swingeing 8% plus interest rates. That act, like the payment notices business, has a penalty lurking in it. But reading those payment notice provisions on their face takes an elaborate analysis to allow a further valuation.

Mr Justice Coulson gave six reasons for being able to adjudicate for the “true valuation” of both interim and final accounts – reasons why the Construction Act permits this and gives relief from the notion of punishment for not sending payment notices:

First, it is open to any adjudicator, arbitrator or court to review or revise any payment certificate or payment decision of the payer.

Second, as to adjudication, the Construction Act says there is no limit on the nature, scope and extent of the dispute that can be referred to adjudication.

Third, if the first adjudication asked about lack of payment notices, as in Grove, there is nothing to prevent a second, separate dispute as to true value.

Fourth, the contract itself may intend or permit a second adjudication as to “true value”. The judge detected this in the JCT contract used in Grove. Actually, he said “it was obvious”. The JCT uses two phrases: one is “the sum due”, the other “the sum stated is due”. Obvious.

The fifth reason is consideration of equality and fairness. In short, once the employer has failed to pipe up, he simply pays up and then, and only then, can he bring the second adjudication about the “true valuation”.

Finally, some of the previous cases in the High Court went in the wrong direction.

It all needed tidying up. Besides, it has always been the case that the payee contractor or payee subcontractor has the right to adjudicate for the “true value” and defeat any wrongheaded payment notices of the sum said to be due or any payless notices. So the sky won’t fall in if the payer can do the same. Obvious.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple